Executive Summary
Since the 1970s, researchers have shown that people value giving up something they possess more than they do acquiring the same item they do not possess. For example, consumers who were given a coffee mug demanded twice as much to give it up as consumers were willing to pay for it. Most measures of loss aversion find that people place approximately twice the value on giving up an item than they do on receiving it.
Since the original demonstrations of loss aversion, many studies have shown loss aversion in numerous domains, from individual investor behavior, to reactions to price and quality changes in orange juice, to basketball tickets, to clean air. The existence of loss aversion may contribute to the success of many marketing practices. For example, trial periods enable a product to become part of the consumer’s endowment, and the purchase question is transformed into the issue of how much the consumer is willing to pay to give up the product.
In the current research, the authors examine some limitations of this seemingly ubiquitous phenomenon. They propose that loss aversion does not occur under certain circumstances. For example, money that is spent as intended is not subject to loss aversion. In other words, consumers have a much easier time spending money that is budgeted for a particular item than they do spending money on that same item if it is not part of their budget. Indeed, they might be willing to pay only half as much for an item that is not part of their budget. In addition, paying more than is budgeted for an item may induce loss aversion for the additional money that is spent beyond the budgeted amount.
These findings have various implications for marketers. For example, if an extrabudgetary purchase (e.g., a luxury item) can be included in a category of budget spending (e.g., good for mental health), loss aversion may be eliminated for the money spent, making it much more likely that consumers’ willingness to pay will meet or exceed the price. In general, marketers may find that positioning their offering in a set of intended purchases may be more valuable than emphasizing the specific benefits the consumer might seek.
Another posited limitation of loss aversion is that goods that are given up as part of a transaction that replaces the benefits of the forfeited good are not subject to loss aversion. That is, when a car is sold to buy a large-screen television, the benefits of the car are not replaced, and thus there is loss aversion for the car. However, if the car is given up as part of a purchase of a new car, there is no loss aversion for the car, inducing consumers to demand much less (about half as much) compensation for giving up the same car. Thus, marketers have an opportunity to encourage upgrading durable items by offering credit for the old item toward the purchase of a new item. This circumvents the loss aversion that would otherwise accompany thoughts of giving up the old item. Even items from different product categories could be traded in if the new item is perceived as providing the same benefits as the old item. By drawing on broad consumer goals to define the benefits of various products (e.g., being a better person, being more efficient), marketers can use different goods as replacements, thus reducing loss aversion for the forfeited good.
Biography
Nathan Novemsky is Assistant Professor of Marketing in the School of Management at Yale University. He earned his doctoral degree in Psychology from Princeton University. His research focuses on how consumers evaluate and use different types of information in situations in which multiple pieces of information are available. He has investigated the types of information that consumers find easy to evaluate and judge (e.g., satisfaction derived from a negotiated outcome). He has also examined the information that consumers use to form an aggregate judgment of the enjoyment of an experience, finding that beliefs about the enjoyment can differ from the actual experienced enjoyment. His recent research has investigated how events leading to a choice affect choices within a sequence of experiences.
Daniel Kahneman is Eugene Higgins Professor of Psychology in the Psychology Department, Woodrow Wilson School, at Princeton University. He has been Professor of Psychology at the University of California, Berkeley; Fellow at the Canadian Institute for Advanced Research; Professor of Psychology at the University of British Columbia; Fellow at the Center for Advanced Study in the Behavioral Sciences; and Professor at the Hebrew University in Jerusalem. Daniel Kahneman is a member of the American Academy of Arts and Sciences and the National Academy of Sciences. He is Fellow of the American Psychological Association, the American Psychological Society, the Society of Experimental Psychologists, and the Econometric Society. He has been the recipient of many awards, such as the Distinguished Scientific Contribution Award of the American Psychological Association, the Warren Medal of the Society of Experimental Psychologists, the Hilgard Award for Career Contributions to General Psychology, and Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel.
J Marketing Research, Volume 42, Number 2, May 2005
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